<Page>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File No. 1-8796
QUESTAR CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF UTAH 87-0407509
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 45433, 180 East 100 South, Salt Lake City, Utah 84145-0433
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 324-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF JULY 31, 2001
- ------------------------------- -------------------------------
Common Stock, without par value 80,955,771 shares
<Page>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- ----------- -----------
(In Thousands, Except Per Share Amounts)
REVENUES $ 285,138 $ 232,542 $ 847,776 $ 569,244 $ 1,544,685 $ 1,037,791
OPERATING EXPENSES
Cost of natural gas and
other products sold 120,024 81,433 451,182 230,800 782,611 410,538
Operating and maintenance 59,971 58,549 122,795 115,585 258,629 235,163
Depreciation and amortization 35,673 35,960 70,603 71,842 140,702 142,384
Other taxes 15,969 11,551 36,781 23,828 63,607 40,510
--------- --------- --------- --------- ----------- -----------
TOTAL OPERATING EXPENSES 231,637 187,493 681,361 442,055 1,245,549 828,595
--------- --------- --------- --------- ----------- -----------
OPERATING INCOME 53,501 45,049 166,415 127,189 299,136 209,196
INTEREST AND OTHER INCOME 4,309 10,831 10,550 23,043 29,189 69,247
OPERATIONS OF UNCONSOLIDATED
AFFILIATES
Income (loss) (1,206) 482 (1,092) 1,701 1,203 (2,529)
Write-down of investment in partnership (49,700)
--------- --------- --------- --------- ----------- -----------
(1,206) 482 (1,092) 1,701 1,203 (52,229)
DEBT EXPENSE (14,330) (16,282) (29,922) (31,842) (61,590) (60,387)
--------- --------- --------- --------- ----------- -----------
INCOME BEFORE INCOME TAXES 42,274 40,080 145,951 120,091 267,938 165,827
INCOME TAXES 15,389 13,875 54,216 43,656 95,927 56,996
--------- --------- --------- --------- ----------- -----------
NET INCOME $ 26,885 $ 26,205 $ 91,735 $ 76,435 $ 172,011 $ 108,831
========= ========= ========= ========= =========== ===========
EARNINGS PER COMMON SHARE
Basic $ 0.34 $ 0.33 $ 1.14 $ 0.95 $ 2.14 $ 1.35
Diluted $ 0.33 $ 0.33 $ 1.12 $ 0.95 $ 2.11 $ 1.35
Average common shares outstanding
Basic 80,864 80,078 80,803 80,414 80,619 80,971
Diluted 81,638 80,352 81,583 80,551 81,444 81,091
Dividends per common share $ 0.175 $ 0.17 $ 0.35 $ 0.34 $ 0.695 $ 0.68
</Table>
See notes accompanying consolidated financial statements
2
<Page>
QUESTAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
June 30, December 31,
2001 2000 2000
(Unaudited)
---------- ---------- ------------
ASSETS (In Thousands)
Current assets
Cash and cash equivalents $ 19,559 $ 9,416
Accounts receivable $ 143,968 173,452 332,318
Hedging contracts 2,933
Inventories, at lower of average cost or market
Gas and oil storage 31,319 16,568 30,062
Materials and supplies 11,678 10,048 10,472
Purchased-gas adjustments 46,874 35,565
Prepaid expenses and other 11,348 10,515 9,189
---------- ---------- ----------
Total current assets 248,120 230,142 427,022
---------- ---------- ----------
Property, plant and equipment 3,649,633 3,413,170 3,544,266
Less accumulated depreciation and
amortization 1,643,794 1,542,561 1,590,273
---------- ---------- ----------
Net property, plant and equipment 2,005,839 1,870,609 1,953,993
---------- ---------- ----------
Securities available for sale 21,185 89,470 33,019
Investment in unconsolidated affiliates 37,145 33,601 34,505
Goodwill, net 19,401 21,961 20,514
Cash held in escrow 4,312 5,387
Regulatory and other assets 64,662 47,945 64,605
---------- ---------- ----------
$2,396,352 $2,298,040 $2,539,045
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Checks outstanding in excess of cash balance $ 1,544
Short-term loans 195,722 $ 146,309 $ 209,139
Accounts payable and accrued expenses 173,405 158,886 311,910
Deferred income taxes - current 17,812 13,515
Purchased-gas adjustments 3,301
---------- ---------- ----------
Total current liabilities 388,483 308,496 534,564
---------- ---------- ----------
Long-term debt 661,802 764,704 714,537
Other liabilities 23,895 27,078 33,680
Deferred income taxes and investment
tax credits 254,932 226,100 246,982
Minority interest 19,666 16,426 18,216
Common shareholders' equity
Common stock 267,329 257,361 268,630
Retained earnings 773,569 657,585 710,125
Other comprehensive income 6,676 40,290 12,311
---------- ---------- ----------
Total common shareholders' equity 1,047,574 955,236 991,066
---------- ---------- ----------
$2,396,352 $2,298,040 $2,539,045
========== ========== ==========
</Table>
See notes accompanying consolidated financial statements
3
<Page>
QUESTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
6 Months Ended
June 30,
2001 2000
--------- ---------
(In Thousands)
OPERATING ACTIVITIES
Net income $ 91,735 $ 76,435
Depreciation and amortization 73,415 74,622
Deferred income taxes and
investment tax credits 15,880 1,573
(Income) loss from unconsolidated affiliates,
net of cash distributions 365 (1,537)
Gain from sales of securities (16,609)
--------- ---------
181,395 134,484
Changes in operating assets and liabilities 23,749 (3,557)
--------- ---------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 205,144 130,927
INVESTING ACTIVITIES
Capital expenditures
Property, plant and equipment (154,991) (155,263)
Other investments (4,000) (7,324)
--------- ---------
Total capital expenditures (158,991) (162,587)
Proceeds from the disposition of
property, plant and equipment 29,783 1,764
Proceeds from the sales of securities and other 374 24,931
--------- ---------
NET CASH USED IN INVESTING
ACTIVITIES (128,834) (135,892)
FINANCING ACTIVITIES
Issuance of common stock 11,131 2,141
Common stock repurchased (12,432) (23,217)
Issuance of long-term debt 285,000 37,476
Repayment of long-term debt (337,059) (6,342)
Change in short-term loans (13,417) 1,751
Cash in escrow account 5,387 32,414
Checks outstanding in excess of cash balances 1,544
Payment of dividends (28,291) (27,348)
Other 2,446
--------- ---------
NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES (85,691) 16,875
Foreign currency translation adjustment (35) (642)
--------- ---------
Change in cash and cash equivalents (9,416) 11,268
Beginning cash and cash equivalents 9,416 8,291
--------- ---------
Ending cash and cash equivalents $ -- $ 19,559
========= =========
</Table>
See notes accompanying consolidated financial statements
4
<Page>
QUESTAR CORPORATION
NOTES ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
Note 1 - Basis of Presentation
The interim financial statements reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods presented. All such adjustments are of a normal recurring
nature. Due to the seasonal nature of the business, the results of operations
for the three-, six- and twelve-month periods ended June 30, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. For further information refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2000.
Note 2 - Comprehensive Income
Comprehensive income is the sum of net income as reported in the Consolidated
Statement of Income and other comprehensive income transactions reported in
Shareholders' Equity. Other comprehensive income transactions that currently
apply result from changes in the market value of securities held for sale,
changes in the market value of energy-hedging contracts and changes in holding
value resulting from foreign currency translation adjustments. These
transactions are not the culmination of the earnings process, but result from
periodically adjusting historical balances to market value. Income or loss is
realized when the securities available for sale are sold or the gas or oil
underlying the hedging contracts is sold.
<Table>
<Caption>
3 Months Ended 6 Months Ended
June 30, June 30,
2001 2000 2001 2000
------- -------- -------- --------
(In thousands)
Comprehensive Income:
Net income $26,885 $ 26,205 $ 91,735 $ 76,435
Other comprehensive income
Unrealized loss on hedging
transactions 55,128 3,028
Unrealized gain (loss) on securities
available for sale 1,118 (15,586) (11,835) 2,576
Foreign currency translation adjustment 2,145 (1,040) (500) (1,560)
------- -------- -------- --------
Other comprehensive income (loss) before
income taxes 58,391 (16,626) (9,307) 1,016
Income taxes on other comprehensive
income (loss) 22,180 (6,485) (3,672) (364)
------- -------- -------- --------
Net other comprehensive income (loss) 36,211 (10,141) (5,635) 1,380
------- -------- -------- --------
Total comprehensive income $63,096 $ 16,064 $ 86,100 $ 77,815
======= ======== ======== ========
</Table>
5
<Page>
Note 3 - Financing
On March 30, 2001, Questar Pipeline redeemed $30 million of its 9 7/8%
debentures. The redemption price was equal to 104.67% of the principal amount
plus interest from December 1, 2000. In addition, Questar Pipeline redeemed $85
million of its 9 3/8% debentures on June 25, 2001. The redemption price was
equal to 104.51% of the principal amount plus twenty-four days of interest.
On May 11, 2001, Questar Pipeline filed a Form S-3 with the Securities and
Exchange Commission to issue up to $250 million of medium-term notes, Series B,
with maturities of nine months to 30 years. On May 29, 2001, Questar Pipeline
issued $100 million of 10-year medium-term notes with a 7.09% coupon rate to
refinance debentures and reduce short-term debt. Additional proceeds from the
sale of notes will likely be used to finance a portion of capital expenditures
and partnership investments, estimated at $180.3 million in 2001.
On March 6, 2001, Questar Market Resources in a public offering issued $150
million of 7.5% notes due 2011 and applied the proceeds toward repayment of a
portion of its outstanding floating-rate bank debt.
Note 4 - Acquisitions
A subsidiary of Questar, QMR, acquired 100% of the common stock of Shenandoah
Energy, Inc. (SEI) for approximately $406 million in cash and assumed debt on
July 31, 2001. SEI is a privately held Denver-based exploration, production,
gathering and drilling company. QMR obtained an estimated 415 billion cubic feet
equivalent of proved oil and gas reserves, gas processing capacity, 90 miles of
gathering lines, 114,000 acres of net undeveloped leasehold acreage and four
drilling rigs located primarily in the Uinta Basin of eastern Utah. The
transaction will be recorded according to the purchase method of accounting.
Any excess in the purchase price over fair value of the assets will be
allocated to the full-cost asset pool. QMR financed the acquisition through
bank borrowings and will consider selling nonstrategic assets and/or issuing
equity to reduce the level of debt.
Questar Gas completed the purchase of 100% of the stock of Utah Gas Service
Company and Wyoming Industrial Gas in a stock for stock exchange on July 12,
2001. With the acquisition, Questar Gas will serve about 10,500 customers in
Moab, Monticello and Vernal in eastern Utah and Kemmerer and Diamondville,
Wyoming. The acquisition cost $10.9 million and Questar Gas exchanged 390,000
shares of Questar common stock. The transaction will be accounted for as a
purchase.
Note 5 - Operations by Line of Business
<Table>
<Caption>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2001 2000 2001 2000 2001 2000
-------- -------- ---------- -------- -------- --------
(In Thousands)
REVENUES FROM UNAFFILIATED CUSTOMERS
Questar Market Resources $152,057 $144,089 $ 382,922 $263,560 $ 768,562 $ 491,672
Questar Regulated Services
Natural gas distribution 109,859 66,957 418,798 266,484 684,302 472,045
Natural gas transmission 12,252 10,305 23,094 19,901 45,693 38,048
Other 1,115 1,324 2,331 1,949 4,024 3,097
-------- -------- ---------- -------- ---------- ----------
Total Regulated Services 123,226 78,586 444,223 288,334 734,019 513,190
Corporate and other operations 9,855 9,867 20,631 17,350 42,104 32,929
-------- -------- ---------- -------- ---------- ----------
Total $285,138 $232,542 $ 847,776 $569,244 $1,544,685 $1,037,791
======== ======== ========== ======== ========== ==========
</Table>
6
<Page>
<Table>
<Caption>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2001 2000 2001 2000 2001 2000
-------- -------- --------- -------- --------- ---------
(In Thousands)
REVENUES FROM AFFILIATES
Questar Market Resources $ 24,685 $ 21,112 $ 52,666 $ 43,402 $ 102,117 $ 83,533
Questar Regulated Services
Natural gas distribution 846 1,217 2,036 2,210 4,600 4,110
Natural gas transmission 18,660 19,102 38,853 39,364 76,065 79,175
Other 392 68 731 136 878 252
Corporate and other operations 9,179 7,743 16,226 17,047 33,765 32,983
-------- -------- --------- -------- --------- ---------
Total $ 53,762 $ 49,242 $ 110,512 $102,159 $ 217,425 $ 200,053
======== ======== ========= ======== ========= =========
OPERATING INCOME (LOSS)
Questar Market Resources $ 39,220 $ 30,455 $ 94,823 $ 56,130 $ 178,796 $ 101,654
Questar Regulated Services
Natural gas distribution (6) (1,965) 43,321 36,784 62,957 46,760
Natural gas transmission 14,904 14,684 29,940 29,719 57,074 57,142
Other 36 130 120 84 (30) 245
-------- -------- --------- -------- --------- ---------
Total Regulated Services 14,934 12,849 73,381 66,587 120,001 104,147
Corporate and other operations (653) 1,745 (1,789) 4,472 339 3,395
-------- -------- --------- -------- --------- ---------
Total $ 53,501 $ 45,049 $ 166,415 $127,189 $ 299,136 $ 209,196
======== ======== ========= ======== ========= =========
NET INCOME (LOSS)
Questar Market Resources $ 23,017 $ 17,182 $ 56,951 $ 32,231 $ 109,762 $ 59,412
Questar Regulated Services
Natural gas distribution (2,528) (3,330) 21,192 17,385 27,970 19,182
Natural gas transmission 6,851 7,076 14,508 14,200 30,133 (8,185)
Other 184 173 372 232 484 493
-------- -------- --------- -------- --------- ---------
Total Regulated Services 4,507 3,919 36,072 31,817 58,587 11,490
Corporate and other operations (639) 5,104 (1,288) 12,387 3,662 37,929
-------- -------- --------- -------- --------- ---------
Total $ 26,885 $ 26,205 $ 91,735 $ 76,435 $ 172,011 $ 108,831
======== ======== ========= ======== ========= =========
</Table>
Note 6 - New Accounting Standard - "Accounting for Derivative Instruments and
Hedging Activities"
The Company adopted the accounting provisions of SFAS 133, as amended,
"Accounting for Derivative Instruments and Hedging Activities" beginning in
January 2001. SFAS 133 addresses the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts. Under the
standard, entities are required to carry all derivative instruments in the
balance sheet at fair value. The accounting for changes in fair value, which
result in gains or losses, of a derivative instrument depends on whether such
instrument has been designated and qualifies as part of a hedging relationship
and, if so, depends on the reason for holding it. If certain conditions are met,
entities may elect to designate a derivative instrument as a hedge of exposure
to changes in fair value, cash flows or foreign currencies. If the hedged
exposure is a fair-value exposure, the gain or loss on the derivative instrument
is recognized in earnings in the period of the change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash-flow exposure, the effective portion of
the gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income in the shareholders' equity section of
the balance sheet and subsequently reclassified into earnings when the
forecasted transaction affects earnings. Any amounts excluded from the
assessment of hedge effectiveness, as well as the ineffective portion of the
gain or loss, is reported in earnings immediately.
7
<Page>
As of January 1, 2001, the Company structured a majority of its energy
derivative instruments as cash flow hedges. As a result of adopting SFAS 133 in
January 2001, the Company recorded a $121 million hedging liability for
derivative instruments. Measured at June 30, 2001, the results of hedging
activities amounted to a $2.9 million current asset. Settlement of contracts
accounted for $65.8 million of the decrease, while a decrease in prices of gas
and oil on futures markets resulted in a $58.1 million decline. The offset to
the hedging asset, net of income taxes, was a $1.9 million unrealized gain on
hedging activities recorded in other comprehensive income in the shareholder's
equity section of the balance sheet. The ineffective portion of hedging
transaction recognized in earnings was not significant. The fair-value
calculation does not consider changes in fair value of the corresponding
scheduled equity physical transactions.
The contracts at June 30, 2001 had terms extending through December 2003. About
82% of those contracts, representing approximately $5 million, settle and will
be reclassified from other comprehensive income in the next 12 months.
Note 7 - Reclassifications
Certain reclassifications were made to the 2000 financial statements to conform
with the 2001 presentation.
8
<Page>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
QUESTAR CORPORATION
June 30, 2001
(Unaudited)
Results of Operations
Questar Market Resources
Questar Exploration and Production, Wexpro, Questar Gas Management and Questar
Energy Trading, collectively, (Market Resources or QMR) conduct exploration and
production, gas gathering and processing, and energy marketing operations.
Following is a summary of Market Resources' financial results and operating
information.
<Table>
<Caption>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- --------
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $152,057 $144,089 $382,922 $263,560 $768,562 $491,672
From affiliates 24,685 21,112 52,666 43,402 102,117 83,533
-------- -------- -------- -------- -------- --------
Total revenues $176,742 $165,201 $435,588 $306,962 $870,679 $575,205
======== ======== ======== ======== ======== ========
Operating income $ 39,220 $ 30,455 $ 94,823 $ 56,130 $178,796 $101,654
Net income $ 23,017 $ 17,182 $ 56,951 $ 32,231 $109,762 $ 59,412
OPERATING STATISTICS
Production volumes
Natural gas (in million cubic feet) 15,844 17,674 31,631 34,624 65,970 66,947
Oil and natural gas liquids (in thousands of
barrels)
Questar Exploration & Production 522 563 1,017 1,117 2,125 2,234
Wexpro 114 140 239 268 492 555
Production revenue
Natural gas (per thousand cubic feet) $ 3.31 $ 2.48 $ 3.74 $ 2.33 $ 3.50 $ 2.21
Oil and natural gas liquids (per barrel)
Questar Exploration & Production $ 20.36 $ 19.77 $ 20.91 $ 20.69 $ 20.60 $ 18.27
Wexpro $ 26.06 $ 25.87 $ 27.04 $ 25.49 $ 28.31 $ 22.85
Wexpro investment base at June 30, net
of deferred income taxes (in millions) $ 127.2 $ 108.2
Marketing volumes in energy equivalent
decatherms (in thousands of decatherms) 23,524 25,180 47,552 52,205 100,979 104,870
Natural gas gathering volumes (in
thousands of decatherms)
For unaffiliated customers 24,526 23,261 46,611 45,039 94,541 87,874
For Questar Gas 8,695 9,235 18,906 19,088 36,609 34,219
For other affiliated customers 6,601 6,514 13,400 11,678 26,790 22,218
-------- -------- -------- -------- -------- --------
Total gathering 39,822 39,010 78,917 75,805 157,940 144,311
======== ======== ======== ======== ======== ========
Gathering revenue (per decatherm) $ 0.13 $ 0.13 $ 0.13 $ 0.14 $ 0.13 $ 0.14
</Table>
9
<Page>
REVENUES
Strong natural gas prices more than offset lower production volumes resulting in
revenues that were 7% higher in the second quarter and 42% higher in the first
half of 2001 when compared with the corresponding 2000 periods. Questar E & P
reported that its average realized natural gas price was 33% higher in the
second quarter and 61% higher in the first half of 2001. Production volumes
decreased in 2001 as a result of selling reserves in place and a natural decline
in older fields. However, production volumes for the second half of 2001 will
increase due to QMR's acquisition of Shenandoah Energy, Inc. (SEI).
On July 31, 2001, QMR acquired SEI at a cost of approximately $406 million
including the assumption of debt. QMR received 415 billion cubic feet equivalent
of proved reserves comprised of approximately 72% gas and 28% oil. SEI is
expected to add 63 million cubic feet equivalent per day of gas and oil to QMR's
nonutility production.
Approximately 58% of gas volumes in the first half of 2001 were hedged with
floors and ceilings averaging $3.04 per Mcf and $3.27 per Mcf, respectively, net
to the well. The remainder of gas production realized prices averaging about
$5.59 per Mcf, driven by cold winter temperatures and an energy shortage in the
western United States. Approximately 58% of gas production for the second half
of 2001, including production from SEI properties, is hedged with floors and
ceilings averaging $3.03 per Mcf and $3.40 per Mcf, respectively, net to the
well. Approximately 16% of 2002 gas production is hedged at a floor of $3.55 per
Mcf and a ceiling of $4.05 per Mcf, net to the well. Hedging activities reduced
revenues from gas sales by $58.6 million in the first half of 2001.
For Questar E & P, prices for oil and natural gas liquids (NGL) were 1% higher
in the first half of 2001. Approximately 60% of oil production in the first half
of 2001 was hedged at an average price of $17.20 per barrel, net to the well.
Realized prices for the remaining oil production averaged about $27 per barrel.
Hedging activities reduced revenues from oil sales by $5.8 million in the first
half of 2001. NGL prices increased 47% over the same period in 2000. QMR does
not hedge the sales price of NGL.
Revenues from energy marketing increased $81.7 million in the first half
comparison primarily due as a result of higher gas prices. The margin from
energy marketing was $6.3 million in the first half of 2001 compared with
$700,000 in the 2000 period.
EXPENSES
Operating and maintenance expenses were higher in the 2001 periods presented
when compared with the corresponding 2000 periods. The expenses of operating
producing properties increased $2.3 million in the first half comparison
primarily due to adding properties. Also, the expenses of operating a gas
storage facility that began operations in the third quarter of 2000 resulted in
a $500,000 increase in the first half of 2001. However, legal costs were $2.1
million lower in the first half of 2001 following the settlement of a major
lawsuit in the second half of 2000.
Lower production more than offset the effect of a higher full-cost amortization
rate resulting in lower depreciation and amortization expense in the 2001
periods presented. The combined U.S. and Canadian full-cost amortization rate
for the first half of 2001 was $.82 per thousand cubic feet equivalent (Mcfe) of
production compared with $.80 for the corresponding quarter a year ago. The 2001
rate increase reflects rising costs associated with exploration and development
operations as a consequence of increased industry activity.
INCOME
QMR's first half net income increased $24.7 million, representing a 77%
improvement over the first half of 2000. The increase resulted from higher
commodity prices and increased earnings for Wexpro. Wexpro's net income was $1.3
million higher in the first half of 2001. Wexpro increased its investment in
development-drilling projects resulting in a $19 million increase in the Wexpro
investment base since June 30, 2000. Wexpro develops gas reserves on behalf of
affiliated company, Questar Gas, which is a rate-regulated distributor of
natural gas.
10
<Page>
Questar Regulated Services
Questar Gas and Questar Pipeline conduct the regulated services of natural gas
distribution, transmission and storage.
Natural Gas Distribution
Questar Gas conducts natural gas distribution operations. Following is a summary
of financial results and operating information.
<Table>
<Caption>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- -------- ---------
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 109,859 $ 66,957 $ 418,798 $ 266,484 $684,302 $ 472,045
From affiliates 846 1,217 2,036 2,210 4,600 4,110
--------- --------- --------- --------- -------- ---------
Total revenues 110,705 68,174 420,834 268,694 688,902 476,155
Natural gas purchases 76,600 35,779 306,754 158,209 482,738 280,011
--------- --------- --------- --------- -------- ---------
Margin $ 34,105 $ 32,395 $ 114,080 $ 110,485 $206,164 $ 196,144
========= ========= ========= ========= ======== =========
Operating income (loss) $ (6) $ (1,965) $ 43,321 $ 36,784 $ 62,957 $ 46,760
Net income (loss) $ (2,528) $ (3,330) $ 21,192 $ 17,385 $ 27,970 $ 19,182
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 11,422 9,197 48,126 43,105 88,394 78,736
Industrial sales 2,519 2,047 5,786 5,251 10,849 9,852
Transportation for industrial
customers 14,571 13,865 29,285 27,882 56,239 54,374
--------- --------- --------- --------- -------- ---------
Total deliveries 28,512 25,109 83,197 76,238 155,482 142,962
========= ========= ========= ========= ======== =========
Natural gas revenue (per decatherm)
Residential and commercial $ 7.81 $ 5.93 $ 7.75 $ 5.52 $ 6.82 $ 5.31
Industrial sales 5.02 2.99 5.37 3.16 4.93 3.07
Transportation for industrial
customers $ 0.13 $ 0.11 $ 0.13 $ 0.12 $ 0.13 $ 0.12
Heating degree days
Colder (warmer) than normal (12%) (31%) (2%) (15%) 4% (12%)
Number of customers at June 30,
Residential and commercial 700,602 686,827
Industrial 1,325 1,352
--------- ---------
Total 701,927 688,179
========= =========
</Table>
REVENUES
Questar Gas' margin increased 5% in the second quarter and 3% in the first half
of 2001 when compared with the same periods of 2000. The higher margin was the
result of a 3.9% general rate increase which went into effect August 11, 2000
higher volumes delivered and new customers. Usage per customer was down 4.5% for
the six-month period in 2001. Total volumes delivered were 14% higher in the
second quarter and 9% higher year-to-date in 2001 compared with 2000 due to new
customers and to colder weather in 2001. Residential volumes were up 24% in the
second quarter and 12% for the first half of 2001 compared with 2000. The number
of new customers added to the system for the year ended December 31, 2001 is
expected to be between 25,000 to 28,000 including the Utah Gas acquisition.
11
<Page>
EXPENSES
Questar Gas' cost of natural gas sold increased 94% for the six-month period of
2001 compared with the 2000 period due to higher gas costs which was the
continuation of a trend which began in the second half of 2000. Gas costs in
rates for the first half of 2001 were $4.67 per Dth compared to $2.23 per Dth in
2000.
Operating and maintenance expenses decreased 2% in the first half of 2001
compared with the prior year period as a result of early retirement labor
savings of $2.3 million which were partially offset by an increase in bad debt
costs of $1 million. Depreciation expenses were 5% lower in both the second
quarter and first half of 2001 when compared with the same period in 2000 due to
computer equipment and software being fully depreciated. Other taxes decreased
15% in the first half of 2001 due to an adjustment of prior year taxes in 2000.
Natural Gas Transmission
Questar Pipeline conducts the natural gas transmission, storage and processing
operations. Following is a summary of financial results and operating
information.
<Table>
<Caption>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2001 2000 2001 2000 2001 2000
------- ------- -------- -------- -------- ---------
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $12,252 $10,305 $ 23,094 $ 19,901 $ 45,693 $ 38,048
From affiliates 18,660 19,102 38,853 39,364 76,065 79,175
------- ------- -------- -------- -------- ---------
Total revenues $30,912 $29,407 $ 61,947 $ 59,265 $121,758 $ 117,223
======= ======= ======== ======== ======== =========
Operating income $14,904 $14,684 $ 29,940 $ 29,719 $ 57,074 $ 57,142
Net income (loss) $ 6,851 $ 7,076 $ 14,508 $ 14,200 $ 30,133 $ (8,185)
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 47,572 35,803 90,006 64,898 183,712 140,073
For Questar Gas 25,746 24,046 64,432 60,361 112,254 104,141
For other affiliated customers 94 1,676 2,005 3,001 7,374 6,696
------- ------- -------- -------- -------- ---------
Total transportation 73,412 61,525 156,443 128,260 303,340 250,910
======= ======= ======== ======== ======== =========
Transportation revenue (per decatherm) $ 0.25 $ 0.29 $ 0.24 $ 0.28 $ 0.24 $ 0.29
</Table>
REVENUES
Revenues were higher in the 2001 periods compared with the 2000 periods due
primarily to increased firm-transportation demand, higher gas processing
revenues, and increased selling prices for hydrocarbon liquids. Transportation
revenues increased 8% in the second quarter and 6% in the first half of 2001
compared with the 2000 periods primarily from increased firm-transportation
volumes. Firm-transportation volumes increased 12.5 million decatherms or 22% in
the 2001 quarter and 28.8 million decatherms or 24% in the first half of 2001
compared with the prior-year periods as a result of increased demand for gas for
electricity generation.
EXPENSES
Operating and maintenance (O & M) expenses were higher in the 2001 periods
compared with the respective 2000 periods. The higher O & M expenses in the
first half of 2001 were due to increased legal costs of $1.2 million, fuel gas
expenses of $.7 million at a gas processing plant, and maintenance expenses of
$.5 million for the Southern Trails Pipeline. Labor cost savings from the early
retirement program effective October 31, 2000, totaled about $1.2 million pretax
in the six-month period of 2001.
12
<Page>
TRANSCOLORADO PIPELINE
Earnings from unconsolidated affiliates in the second quarter of 2001 include
the Company's share of operating losses from the TransColorado Pipeline
partnership of $1.7 million. The net loss reported for the 12-month period of
2000 was due mainly to a pretax operating loss of $8.2 million from
TransColorado and a writedown by a subsidiary of Questar Pipeline of its
investment in the partnership that holds the TransColorado investment.
Consolidated Results of Operations
REVENUES
Higher natural gas prices were primarily responsible for a 23% increase in
revenues in the second quarter and a 49% increase in the first half of 2001
ended June 30. The average realized selling price for natural gas increased 33%
in the second quarter and 61% in the first half of 2001 and more than offset the
effect of lower production volumes when compared with the same periods of 2000.
Revenues reported by exploration and production, natural gas distribution and
energy marketing operations were directly affected by the higher gas prices.
EXPENSES
The cost of natural gas and other products sold, which primarily includes
natural gas distribution and energy marketing activities, was higher in the 2001
periods presented as a result of increased natural gas prices.
Operating and maintenance expenses were higher in the 2001 periods presented
when compared with the same periods in 2000 primarily due to adding gas and oil
properties and a storage facility, increasing the number of natural gas
customers and acquiring an internet services business. Consonus, an internet
services business acquired mid-year 2000, recorded a $1.3 million restructuring
charge in the second quarter of 2001. Consonus reported after tax losses of $2
million in the second quarter and $3.7 million in the first half of 2001 due to
lower internet service revenues and higher expenses. Labor cost savings from an
early-retirement program offered to qualifying employees partially offset the
increases discussed.
Depreciation and amortization expense was lower in the 2001 periods presented
when compared with the prior year as a result of lower full-cost amortization,
fully depreciating several information systems in 2000 and extending the
estimated useful life of a processing plant. Amortization of goodwill was $.8
million higher in the first half of 2001.
Other taxes increased because of higher gas prices and the effect on
production-related taxes. Debt expense was lower in the 2001 periods because of
lower interest rates on debt. In the first half of 2000, interest and other
income included a $16.6 million pretax gain from selling securities. The sales
of securities resulted in after tax gains of $4.6 million and $10.1 million in
the second quarter and first half of 2000, respectively. There were no
securities sales in the first half of 2001. In the first quarter of 2001, the
sale of nonstrategic gathering properties resulted in a $1.2 million pretax
gain.
The effective income tax rate for the first half was 37.1% in 2001 and 36.4% in
2000. The Company recognized $3.3 million of nonconventional fuel tax credits in
the 2001 period and $3.2 million in the 2000 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities for the first half of 2001 was $74.2
million higher than the amount generated in the same period of 2000. Increased
net income, collection of cash deposited as collateral for qualifying hedges and
collection of receivables were the primary explanations of the increase.
13
<Page>
Investing Activities
A comparison of capital expenditures for the first half of 2001 and 2000 plus an
estimate for calendar year 2001 is presented below. Capital expenditures for
calendar year 2001 are estimated to be $863 million. The forecast includes the
acquisition of SEI on July 31, 2001 for approximately $406 million, $77.5
million in 2001of a forecast $80 million cost for a 75-mile pipeline in central
Utah and $38 million for the Questar Southern Trails Pipeline.
<Table>
<Caption>
Actual Forecast
---------------------- --------------
6 Months Ended 12 Months
June 30, Ended
2001 2000 Dec. 31, 2001
-------- -------- -------------
(In Thousands)
Questar Market Resources $ 83,515 $101,455 560,000
Questar Regulated Services
Natural gas distribution 27,835 28,580 74,900
Natural gas transmission 40,865 25,234 180,300
Other 1,176 88 4,800
-------- -------- -------
Total Questar Regulated Services 69,876 53,902 260,000
Corporate and other operations 5,600 7,230 35,000
-------- -------- -------
$158,991 $162,587 $855,000
======== ======== ========
</Table>
Financing Activities
In the first half of 2001, capital expenditures and a $52.1 million reduction of
long-term debt were funded from net cash provided from operating activities and
proceeds from the sale of nonstrategic assets. Financing for forecasted capital
expenditures for 2001 is expected to come from cash provided from operating
activities, bank borrowings and issuing long-term debt. The Company financed the
acquisition of SEI through bank borrowings and will consider selling
nonstrategic assets and/or issuing equity to reduce the level of debt.
Short-term borrowings at June 30, 2001 were comprised of $160 million of
commercial paper and $35.7 million of short-term bank loans. A year earlier, the
Company had issued $98.3 million of commercial paper and $48 million of bank
loans. On March 6, 2001, Questar Market Resources issued $150 million of
medium-term notes and used the proceeds to repay $139 million of long-term bank
loans. On May 11, 2001, Questar Pipeline filed a Form S-3 with the Securities
and Exchange Commission to issue up to $250 million of medium-term notes with
maturities from nine months to 30 years. On May 29, 2001 Questar Pipeline issued
$100 million of medium-term notes and used the proceeds to redeem long-term
debentures and reduce short-term debt. Future issuances by Questar Pipeline
will be used to finance a portion of capital expenditures and partnership
investments, estimated at $180.3 million in 2001.
Regulatory Matters
Questar Southern Trails (QTS), a Questar Pipeline subsidiary, has secured a
long-term gas-transportation contract for the entire initial capacity on the
east segment of the Southern Trails Pipeline project. The east segment has the
capacity to transport 80,000 decatherms (Dth) per day from multiple receipt
points in the San Juan Basin near the Four Corners area (where Utah, Arizona,
Colorado and New Mexico meet) to multiple delivery points at or near the
California border. QTS is also currently seeking customers for Southern Trails'
west zone, which runs from near the California state line to the Long Beach
area. The west zone has a capacity of up to 120,000 Dth per day. However, QTS's
efforts to place the west zone in service have been slowed by California
regulatory issues. Specifically, the Residual Load Service (RLS) tariff penalty
imposed by Southern California Gas, the dominant gas-transportation company in
the region, deters existing customers from using alternate natural gas suppliers
if they elect to switch part of their
14
<Page>
transportation to a competing pipeline in Southern California Gas' service area.
On August 2, 2001, the California Public Utilities Commission (CPUC) issued an
order replacing the RLS with a peaking rate. While the peaking rate is less
punitive than the RLS, it does not go far enough to remove the obstacles faced
by Southern Trails. QTS has urged California officials to seek expedited remedy
in this situation. In light of the CPUC decision, QTS will continue its efforts
to market pipeline capacity on Southern Trails, while evaluating alternative
uses of the line.
Questar Gas filed semi-annual gas cost filings in June 2001 without changing the
gas costs in rates. The filings were approved by the Public Service Commissions
of Utah and Wyoming effective July 1, 2001. Depending upon the market prices of
natural gas, the Company may file to adjust gas costs in rates for the fourth
quarter of 2001.
Business Development
Questar Pipeline (QPC) announced several growth initiatives to address the
western U.S. need for expanding natural gas transportation and storage
services. These growth initiatives include the following:
Expand the interstate transmission system - QPC held "open seasons" to confirm
support for expanding its core pipeline system, which serves gas-producing
basins in Utah, Wyoming and the western slope of Colorado. The open seasons will
determine needed system expansions, optimal size of the expansions, preferred
in-service dates, and receipt and delivery points shippers would utilize.
Depending on customer response and federal approval, significant expansion could
be put in place in 2002.
Salt cavern storage facility - QPC also held an open season with good initial
response for its proposed salt-cavern storage facility. QPC is working with
potential customers to obtain the necessary market support for this project. The
storage facility, which has been under development for several years is a high
deliverability natural gas storage facility. Each of the four caverns will hold
up to 3.5 billion cubic feet of gas and could be cycled up to 12 times a year.
This facility is ideal for peaking power generation and other flexible services,
which rely on immediate delivery of supplies.
Major trading hub - QPC has announce its intention to leverage on its unique hub
and spoke pipeline system by developing new hub services such as "parking"
(temporary storage) and "balancing" (matching additions and withdrawals).
Development of a hub will increase liquidity, trading and transportation on and
between QPC and other interstate pipelines.
Quantitative and Qualitative Disclosures about Market Risk
QMR's primary market-risk exposures arise from commodity-price changes for
natural gas, oil and other hydrocarbons, changes in long-term interest rates
and changes in the market value of securities available for sale. QMR has an
investment in a foreign operation that may subject it to exchange-rate risk.
QMR also has reserved pipeline capacity for which it is obligated to pay $3
million annually for the next six years, regardless of whether it is able to
market the capacity to others.
HEDGING POLICY
The Company has established policies and procedures for managing market risks
through the use of commodity-based derivative arrangements. Primary objectives
of these hedging transactions are to support the Company's earnings targets and
to protect earnings from downward moves in commodity prices. The Company will
target between 50 and 75% of the current year's production hedged at or above
plan levels by the first of March in the current year. The Company will ladder
in these hedges, to reach forward beyond the current year when price levels are
right. The volume of production hedged and mix of derivative instruments
employed are regularly evaluated and adjusted by management in response to
changing market conditions and reviewed periodically by the Board of Directors.
Additionally, under the terms of the Market Resources' revolving credit
facility, not more than 75% of Market Resources' production quantities can be
committed to hedging arrangements. The Company does not enter into derivative
arrangements for speculative purposes.
15
<Page>
ENERGY-PRICE RISK MANAGEMENT
Oil and natural gas prices fluctuate in response to changes in supply and
demand. Market Resources bears a majority of the risk associated with commodity
price changes and uses hedge arrangements in the normal course of business to
limit the risk of adverse price movements. However, these same arrangements
usually limit future gains from favorable price movements.
QMR held hedge contracts covering the price exposure for about 61.6 million dth
of gas and 459,000 barrels of oil at June 30, 2001. A year earlier the contracts
covered 50.3 million dth of natural gas and 1.7 million barrels of oil. The
hedging contracts exist for a significant share of QMR-owned gas and oil
production and for a portion of energy-marketing transactions. The contracts at
June 30, 2001 had terms extending through December 2003. About 82% of those
contracts, representing approximately $5 million, settle and will be
reclassified from other comprehensive income in the next 12 months.
The undiscounted mark-to-market adjustment of financial gas and oil
price-hedging contracts at June 30, 2001 was a negative $4.3 million. A 10%
decline in gas and oil prices would cause a positive mark-to-market adjustment
of $7.9 million; while a 10% increase in prices would cause a negative
mark-to-market adjustment of $7.9 million. The mark-to-market adjustment of gas
and oil price-hedging contracts at June 30, 2000 was a negative $69.1 million. A
10% decline in gas and oil prices at that time would have caused a positive
mark-to-market adjustment of $20.3 million. Conversely, a 10% increase in prices
would have resulted in a $20.3 million negative mark-to-market adjustment at
that date. The calculations reflect energy prices posted on the NYMEX, various
"into the pipe" postings, and fixed prices on the indicated dates. These
sensitivity calculations do not consider changes in the fair value of the
corresponding scheduled physical transactions (i.e., the correlation between the
index price and the price to be realized for the physical delivery of gas or oil
production), which should largely offset the change in value of the hedge
contracts.
INTEREST-RATE RISK MANAGEMENT
As of June 30, 2001, the Company owed $57.3 million of variable-rate long-term
debt. The book value of variable-rate debt approximates fair value.
SECURITIES AVAILABLE FOR SALE
Securities available for sale represent equity securities of high-tech and
communication enterprises traded on national exchanges. In the first half of
2001, the value of these investments has decreased dramatically and is reflected
in comprehensive income. As of June 30, 2001, securities of XO Communications
held by the Company, had a market value less than the Company's basis. A 10%
change in prices of the entire portfolio would result in a $2.1 million change
of value as of June 30, 2001.
FOREIGN CURRENCY RISK MANAGEMENT
The Company does not hedge the foreign currency exposure of its foreign
operation's net assets and long-term debt. Long-term debt held by the foreign
operation, amounts to $42.4 million (U.S.), is expected to be repaid from future
operations of the foreign company.
Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of Section
27(a) of the Securities Act of 1933, as amended, and Section 21(e) of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included or incorporated by reference in this
report, including, without limitation, statements regarding the Company's future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
In addition, forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may", "will", "could", "expect",
"intend", "project", "estimate", "anticipate", "believe", "forecast", or "
"continue" or the negative thereof or variations thereon or similar terminology.
Although these statements are made in good faith and are reasonable
representations of the Company's expected performance at the time, actual
results may vary from management's stated
16
<Page>
expectations and projections due to a variety of factors.
Important assumptions and other significant factors that could cause actual
results to differ materially from those expressed or implied in forward-looking
statements include changes in general economic conditions, gas and oil prices
and supplies, competition, rate and regulatory issues, regulation of the Wexpro
settlement agreement, availability of gas and oil properties for sale or for
exploration and other factors beyond the control of the Company. These other
factors include the rate of inflation, quoted prices of securities available for
sale, the weather and other natural phenomena, the effect of accounting policies
issued periodically by accounting standard-setting bodies, and adverse changes
in the business or financial condition of the Company.
17
<Page>
Part II
Other Information
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Questar Corporation (the "Company") held its annual meeting of stockholders
on May 15, 2001. The following directors were elected at the meeting: Teresa
Beck, R. D. Cash, Gary G. Michael, Gary L. Nordloh, and Scott S. Parker. The
following is a tabulation of votes involving each candidate elected at the
meeting:
<Table>
<Caption>
Name Votes For Votes Withheld
---- --------- --------------
Teresa Beck 69,167,537 3,653,425
R. D. Cash 60,496,873 12,324,089
Gary G. Michael 70,072,817 2,748,145
Gary L. Nordloh 69,128,548 3,692,414
Scott S. Parker 69,169,831 3,651,131
</Table>
The Company's directors are divided into three classes. Other directors, whose
terms extend after the annual meeting include P. J. Early, James A. Harmon
(appointed to fill a vacancy effective June 1, 2001), W. W. Hawkins, Robert E.
Kadlec, Dixie L. Leavitt, Keith O. Rattie, D. N. Rose, and Harris H. Simmons.
The Company's stockholders also approved amendments to the Long-term Stock
Incentive Plan. Of the 63,541,505 shares represented on this issue, 36,758,208
shares were voted in favor of the proposed amendments, 25,941,681 were voted
against the proposed amendments, and 841,616 shares abstained on the issue.
Brokers did not have discretionary voting on this matter. The difference between
the 72,820,962 shares that were voted on the election of directors and the
63,541,505 shares voted on the proposed amendments reflects shares that could
not be voted by brokers in the absence of specific instructions from beneficial
owners.
ITEM 5. OTHER INFORMATION.
James A. Harmon, age 65, was appointed to serve as a director of the
Company effective June 1, 2001. He was appointed to the remainder of a term that
will expire in May of 2002. He served as a director of the Company from August
of 1976 to July of 1997, when he resigned to serve as Chairman and President of
the Export-Import Bank of the United States. Prior to serving in this position,
Mr. Harmon spent 38 years as an investment banker with Wertheim Co. and Wertheim
Schroder & Co.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. The Company is not filing any exhibits as part of this report.
b. On August 13, 2001, the Company filed a Current Report on Form 8-K
dated July 31, 2001, disclosing the acquisition of Shenandoah Energy Inc. by
Questar Market Resources, Inc.
18
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUESTAR CORPORATION
(Registrant)
August 13, 2001 /s/ R. D. Cash
- --------------- --------------------------------------
(Date) R. D. Cash
Chairman of the Board and
Chief Executive Officer
August 13, 2001 /s/ S. E. Parks
- --------------- --------------------------------------
(Date) S. E. Parks
Senior Vice President, Treasurer and
Chief Financial Officer
19